X

Watching the digital revolution

A digital revolution is powering the consumer electronics industry, and personal video recorders are leading the pack.

5 min read
A digital revolution is powering the consumer electronics industry.

Digital and Internet appliances are entering mainstream markets as costs have come down and services offerings have improved. DVD players and digital cameras have recently found widespread appeal. Businesspeople and students alike have embraced handheld organizers and other personal data assistants (PDAs). The market for portable digital music players has exploded and will continue to grow as more music distribution channels set up shop on the Net.

The personal video recorder is an emerging digital consumer electronics appliance that merges PC technology with the TV to produce an entertainment system with recording and programming features. Currently, TiVo and Replay Networks provide subscription-based television services based on this type of digital set-top box platform. Philips Electronics and Sony are following with their own versions of personal video set-top systems.

Personal video recorder systems allow viewers to pause, record, and instantly replay live television programs. The set-top boxes store programming on computer hard-disk drives and let viewers create personalized television "channels" that are automatically recorded and stored based on a user's profile. Both TiVo and Replay allow viewers to easily record television shows and are much easier to program than a standard VCR.

These companies hope in the future to offer network partners the opportunity to beam targeted advertising to viewers. The systems will send commercials to specific viewers, allowing advertisers to increase the effectiveness by targeting an audience that is likely to be receptive to their individual products. For example, Nissan may want to push new sports utility vehicles at viewers whose profiles indicate that they like sports and outdoor programs.

TiVo and Replay Networks are shipping their personal video recorders today. TiVo offers two versions: one that supports up to 14 hours of recorded programming, and another that supports 30 hours. Replay Networks offers three versions: a 10-hour storage system, a 14-hour system, and a 28-hour system.

The personal video recorder should be a huge commerce platform in the future. As the technology becomes more widespread, advertisers will be able to offer more details on products or specific buying opportunities to targeted audiences. By pressing a button on a remote control, viewers will be able to learn more about the products they see in advertisements and even buy products through the system.

Indeed, these type of set-top systems may facilitate e-commerce, perhaps even surpass such transactions over PC systems. Television as an appliance is more widely used than the personal computer, and the success of television shopping channels--such as QVC--leads one to believe that once set-top and "television-commerce" services become widely adopted, shopping through this platform will catch on.

Furthermore, over 98 million U.S. households own televisions and over 75 percent of these subscribe to cable television. Worldwide, over 900 million households have televisions.

As an added service for televisions, like cable services, set-top systems could share a significant portion of the television market in the next few years. If these digital systems are successful, most major consumer electronics vendors are likely to create and brand their own set-top products to benefit from the huge market opportunity.

The struggles surrounding WebTV provide an important lesson on reaching mass markets. Today's personal video recorders present a different experience for users than previous Internet and interactive television options, as they are far easier to use. TiVo and Replay services offer easy-to-use menu screens and remote controls that are similar to a standard television remote. With one or two clicks, viewers can record and play their favorite shows. WebTV was unable to grab a large audience because too many TV viewers were not familiar with the system's computer keyboard interface. In the future, viewers may be able to buy items and surf the Internet with similar ease through these set-top systems.

Consumers are more ready than ever to adopt new consumer electronics devices. DVD players have been one of the fastest-adopted appliances, after an universal standard was set and DVD disks became widely available. In the past year, digital audio players have become popular, emerging from obscurity to become one of the fastest growing digital consumer appliances. Because of the familiar TV interface, set-top systems should also find rapid adoption, and in the process create an opportunity for companies, investors, and consumers alike.

Personal video recorders are one of many new and interesting technologies on the consumer electronics front. As these Internet devices become more popular, the digital technology that powers them will also represent a growing investment opportunity.

Robertson Stephens maintains a market in the shares of TiVo and has either been a managing or comanaging underwriter for it or has privately placed securities of TiVo within the past three years.

BancBoston Robertson Stephens ("Robertson Stephens") is a wholly owned subsidiary of Fleet Boston Corporation and is an NASD member and a member of all major exchanges and SIPC. The information contained herein is not a complete analysis of every material fact respecting any company, industry or security. Although opinions and estimates expressed herein reflect the current judgment of Robertson Stephens, the information upon which such opinions and estimates are based is not necessarily updated on a regular basis; when it is, the date of the change in estimate will be noted. In addition, opinions and estimates are subject to change without notice.

This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from the results described in the forward-looking statements. Robertson Stephens from time to time performs corporate finance or other services for some companies described herein and may occasionally possess material, nonpublic information regarding such companies. This information is not used in the preparation of the opinions and estimates herein. While the information contained in this report and the opinions contained herein are based on sources believed to be reliable, Robertson Stephens has not independently verified the facts, assumptions and estimates contained in this Report. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinions contained in this Report. Robertson Stephens, its managing directors, its affiliates, and/or its employees may have an interest in the securities of the issue(s) described and may make purchases or sales while this report is in circulation.

BancBoston Robertson Stephens International is regulated by the Securities and Futures Authority in the United Kingdom.

The securities discussed herein are not FDIC insured, are not deposits or other obligations or guarantees of Fleet Bank or BankBoston N.A., and are subject to investment risk, including possible loss of any principal amount invested.